Question

You have entered into a long forward contract on a dividend-paying stock some time ago, and this will expire in six months. It has a delivery price of $40 and the current stock price is $35. The stock provides a fixed dividend yield of 8% with semi-annual compounding. If the risk-free rate is 12% per annum with continuous compounding, what is the value of this long forward contract?

A. $6.72

B. -$4.02

C. $4.02

D. -$6.72

Answer 1

correct option is B. -$4.02

Step-by-step explanation:

given data

delivery price = $40

current stock price = $35

fixed dividend yield = 8% = 0.08

risk free rate = 12% = 0.12

solution

as we know that forward contract is a agreement that is made between 2 parties ( seller or buyer ) asset in future at today fix price in specified time,

we get here long forward contract value that is express as

long forward contract =
`(stock\ price)/((1+dividend\ rate)^t) -(forward\ rate)/(e^(r*t))` ...................1

put here value we get

long forward contract =
`(35)/((1+0.08)^(6/12)) -(40)/(e^(0.12*6/12))`

solve it we get

long forward contract = -$4.02

so correct option is B. -$4.02